Chapter 14 Distributions to Shareholders: Dividends and Share Repurchases 453change is likely to continue. Thus, the dip in Chevron’s earnings in 2001 and 2002
turned out to be temporary, so the dividend was maintained and even increased
during those years. The huge earnings and cash " ow gains after 2002—which have
continued into 2008—suggest that dividends, repurchases, and pro! table new in-
vestments will continue into the future. But Chevron does deal with oil; and with
that commodity, strange things can happen.
14-3c Payment Procedures
Companies normally pay dividends quarterly; and if conditions permit, the divi-
dend is increased once each year. For example, Katz Corporation paid $0.50 per
quarter in 2008, or at an annual rate of $2.00. In common! nancial parlance, we say
that Katz’s 2008 regular quarterly dividend was $0.50 and its annual dividend was
$2.00. In late 2008, Katz’s board of directors met, reviewed projections for 2009,
and decided to keep the 2009 dividend at $2.00. The directors announced the $2.00
rate, so stockholders could count on receiving it unless the company experienced
unanticipated operating problems.
The actual payment procedure is as follows:
- Declaration date. On the declaration date—say, November 7—the directors
meet and declare the regular dividend, issuing a statement similar to the
following: “On November 7, 2008, the directors of Katz Corporation met
and declared the regular quarterly dividend of 50 cents per share, payable
to holders of record at the close of business on December 5, payment to be
made on January 2, 2009.” For accounting purposes, the declared dividend
becomes an actual liability on the declaration date. If a balance sheet was
constructed, the amount ($0.50) # (Number of shares outstanding) would
appear as a current liability and retained earnings would be reduced by a
like amount. - Holder-of-record date. At the close of business on the holder-of-record date,
December 5, the company closes its stock transfer books and makes up a list of
shareholders as of that date. If Katz Corporation is noti! ed of the sale before
5 p.m. on December 5, the new owner will receive the dividend. However, if
noti! cation is received on or after December 6, the previous owner receives
the dividend check. - Ex-dividend date. Suppose Jean Buyer buys 100 shares of stock from John
Seller on December 2. Will the company be noti! ed of the transfer in time to
list Buyer as the new owner and thus pay the dividend to her? To avoid
con" ict, the securities industry has set up a convention under which the
right to the dividend remains with the stock until two business days prior
to the holder-of-record date; on the second business day before that date,
the right to the dividend no longer goes with the shares. The date when the
right to the dividend leaves the stock is called the ex-dividend date. In this
case, the ex- dividend date is two business days prior to December 5, or
December 3:
Dividend goes with stock if it is bought on or before this date December 2
Ex-dividend date: Buyer does not receive the dividend December 3
Buyer does not receive the dividend December 4
Holder-of-record date; not normally of concern to stockholder December 5
Therefore, if Buyer is to receive the dividend, Buyer must buy the stock on or
before December 2. If Buyer buys it on December 3 or later, Seller will receive
the dividend because he or she will be the of! cial holder of record.
Katz’s dividend amounts to $0.50, so the ex-dividend date is important.
Barring " uctuations in the stock market, we would normally expect the price
Declaration Date
The date on which a firm’s
directors issue a statement
declaring a dividend.Declaration Date
The date on which a firm’s
directors issue a statement
declaring a dividend.Holder-of-Record Date
If the company lists the
stockholder as an owner
on this date, the
stockholder will receive
the dividend.Holder-of-Record Date
If the company lists the
stockholder as an owner
on this date, the
stockholder will receive
the dividend.Ex-Dividend Date
The date on which the
right to the current
dividend no longer
accompanies a stock; it is
usually two business days
prior to the holder-
of-record date.Ex-Dividend Date
The date on which the
right to the current
dividend no longer
accompanies a stock; it is
usually two business days
prior to the holder-
of-record date.